Speculating on Nvidia's Earnings Event

Nvidia (

) will be

. Given its recent decline, the news is unlikely to be very good. However, with a contrarian thought in this case, our trading group thinks getting long on the stock can make sense here. However, things can go very wrong on NVDA, and therefore we definitely want protection for ourselves. Below is a chart of Nvidia

comparing with the Semiconductor HOLDRS

for the past year. As our readers can see, it's not a pretty picture.

Nvidia's weakness is mainly due to its product cycle problems, and its most recent weakness is mainly due to its

by > $100 million. That was quite a surprise for a lot of analysts, and expectations were dramatically lowered. With such bad outlook, why would we want to take a long position on Nvidia? A couple of reasons:

We believe that given the low expectations, any good news on Nvidia

can provide a pop to the stock on earnings date. Nonetheless, we want to protect our downside when we turn out to be wrong, or very very wrong. The strategy we will choose is a married put option trade. We will buy a put to protect our downside, and go long the stock in order to capture the upside if we are proved right. A table of the married long strategy for NVDA can be found at

because it's a stock with upcoming earnings within 3 weeks. NVDA's friday's (Aug 6) close is 9.55, drifted up from its low of $8.84 on Aug. 3. We think the stock can put a bottom at $9/share unless there's very bad news on earnings date, and can drift up to > $10 if things can stabilize and move to > $11 if there's unexpected good news. Because of the uncertainly and the bad technical picture of NVDA, we want to buy the Aug 20 $9 put instead of a $10 put. For the $9 put, the current downside is 7.72% in case the stock tanks because of bad news, but the trade gets to make money if NVDA rises just 1.57%. In this case, 7.72% downside is a little higher than our tolerance, even though it represents a worst case scenario, so we want to wait for NVDA to come down a little closer to $9/share before earnings date for us to pull the trigger. Of course, NVDA can just move higher and never comes down, and we lose the opportunity, but we would rather err on the conservative side in this case. If we get to pull the trigger on this trade, our best hope is for NVDA to have some real good news, so we get to capture all the upside beyond that. If it doesn't work out, we have the comfort to know that we have limited downside because of the put option we purchase.